6/09/2009 @ 4:50PM

Congress Subpoenas Fed Over BoA Deal

Congress is turning up the heat on banking regulators for their role in
Bank of America
‘s purchase of Merrill Lynch.

The House Oversight and Government Reform Committee said today they have subpoenaed the Federal Reserve for e-mails, notes of conversations and other documents related to what transpired behind the scenes last fall and winter as
Bank of America
navigated the Merrill transaction.

Statements by Bank of America’s Chief Executive
Kenneth
Lewis
Kenneth Lewis
have suggested that the Fed and the Treasury pressured him to follow through on the merger despite mounting losses at Merrill that gave Bank of America’s board and management cold feet.

Lewis is set to testify to the committee this Thursday about the Merrill transaction and the government’s promise of extra financial assistance to get it done. Lewis told New York’s attorney general earlier this year that Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke threatened to remove him from his job if he walked away from the deal.

There is also a dispute about whether Lewis was pressured by the regulators not to disclose the losses to shareholders until after the deal closed Jan. 1. The Treasury and the Fed have denied they directed Lewis’ communications, or lack thereof, to his shareholders.

The House committee has been investigating who said what to whom and when. Lewis will testify about when Bank of America executives knew about the Merrill losses and what role the regulators played in making sure the deal got completed.

Bank of America agreed to buy Merrill Lynch after frenzied due diligence over a mid-September weekend. The deal saved Merrill from the same fate as
Lehman Brothers
, which collapsed into bankruptcy that same weekend.

But as the months wore on and the financial crisis worsened, Merrill’s losses from derivatives and mortgage-related investments mounted and would eventually translate into a $15 billion hit in the fourth quarter.

Lewis wanted to invoke a material adverse change clause to walk away from the deal, but the government urged completing the transaction to prevent further upheaval in the markets.

In a series of phone calls and e-mails, as described in testimony released by the New York attorney general, Lewis negotiated the extra government assistance the bank would get for completing the deal, taking it on their word when the regulators refused to put it in writing.

In a memo to his board members sent Dec. 22, Lewis says Paulson would not send a letter of any substance without public disclosure, “which of course we don’t want.”

The merger closed in early January. On Jan. 16, Bank of America announced it got $20 billion extra from the government’s Troubled Asset Relief Program, helping to fill the Merrill hole, plus federal guarantees on $118 billion of assets.

The troubled deal, and an earlier acquisition of Countrywide Financial, angered many Bank of America shareholders, who have seen their holdings decimated in the last year. Lewis lost his job as chairman of the company at last month’s annual shareholder meeting but continues to hold on as chief executive.

Now Countrywide’s former chief executive and co-founder, Angelo Mozilo, faces civil fraud and insider trading charges from the Securities and Exchange Commission, another potential black cloud for Lewis. Bank of America is paying Mozilo’s legal fees, according to a Reuters story on Tuesday.